Thursday, June 12, 2008
The Eleventh Circuit's recent opinion in Preis v. Lexington Ins. Co., 2008 WL 2247140 (11th Cir. 2008), contains a discussion of the most fundamental, and yet sometimes overlooked, element of Federal Rule of Evidence 408. In Preis, the home of Richard and Victoria Preis on Mobile Bay, in Point Clear, Alabama, was severely damaged by Hurricane Katrina. According to Richard, the house had a replacement value in excess of $1,200,000 and the loss on personal property in the house was in excess of $750,000. Richard had two sets of insurance policies covering the house and its contents. First, he had a homeowner's policy ("the Lexington policy"), which was an all-risk policy that insured against any direct loss of personal or structural property of the home at issue, with certain exclusions, such as an exclusion for loss caused "directly or indirectly" by "water damage."
The second relevant set of insurance policies was for flood damage; Richard had a primary flood policy with Hartford Insurance Company, and an excess flood insurance policy with WNC Insurance Services. Following Hurricane Katrina, Richard submitted a claim to both Hartford Insurance and to WNC Insurance Services and received a total of $587,659.71 from them, the full policy limits of both policies. Richard also notified Lexington of the loss in order to recover for wind damage, prompting Lexington to retain an independent adjuster, Reid Jones McRorie & Williams, to investigate the claim. Reid Jones issued a final report several months later, indicating that the majority of the damage to the house was a result of "storm surge," and that the "[moderate] wind damage was primarily limited to the roof." Reid Jones estimated that Pries was due a payment in the amount of $72,155.96 for the damage that had not been caused by flood waters, leading Lexington to make Richard an unconditional tender for $53,135.97, which reflected Reid Jones' estimate less the policy's wind deductible of $19,020.00.
Richard rejected Lexington's tender and notified Lexington of his intent to file a lawsuit, whereupon Lexington retained the engineering services of Project Time & Cost ("PT & C"), which confirmed that the majority of the house was damaged as a result of storm surge, but that some damage was attributable to wind damage. Based on PT & C's report, Reid Jones readjusted Richard's estimated loss, and increased their unconditional tender by $11,031.90 to $64,167.86. Pries again rejected the loss amount and sued Lexington.
At trial, Lexington presented evidence concerning, inter alia, the insurance payments from Hartford and WNC to prove that the majority of damage was caused by flooding. At the end of the trial, the jury awarded Richard and Victoria $70,000 for damages to the structure attributable to wind, and they appealed to the 11th Circuit, claiming that the trial court erred in allowing the introduction of evidence about the insurance payments from Hartford and WNC. The Eleventh Circuit noted that Federal Rule of Evidence 408 provides in relevant part that:
"Evidence of the following is not admissible on behalf of any party, when offered to prove liability for, invalidity of, or amount of a claim that was disputed as to validity or amount, or to impeach through a prior inconsistent statement or contradiction:
(1) furnishing or offering or promising to furnish or accepting or offering or promising to accept a valuable consideration in compromising or attempting to compromise the claim."
In other words, if Hartford and/or WNC refused to pay the full policy limits on Richard's insurance policy, and the parties eventually reached a settlement regarding how much money would be paid, such as $400,000, the amount of the parties settlement would have been inadmissible to prove that flooding caused $400,000 of damage to the house. According to the court in Preis, however, the 11th Circuit has "specifically rejected the notion that 'the payment of a claim by an insurance company, where there is no evidence that the insurance company ever disputed the claim, qualifies as a compromise within the meaning of Rule 408.'...Since [Richard] submitted his claim to the flood insurers and received the full policy limits from both of them absent any dispute as to the validity of his claim, the district court did not abuse its discretion in finding that Rule 408 did not bar admissibility of the payments."
In other words, in such cases, there is no "claim that was disputed as to validity or amount, making Rule 408 inapplicable.